Saturday, 4 December 2010

Fairness on Tax

Chasing alleged tax-dodgers (both corporations and individuals) seems a worthy cause, after all it's useful to stress paying one's fair share of tax is a key plank of social and corporate responsibility.

But I fear adverse publicity for a few alleged wrongdoers will do little to change corporate attitudes to tax, given the persistent undercurrent of corporate tax émigrés.

What the UK needs is a wholesale review of tax, with a focus on corporation tax and high net earners, as the current system clearly is doing very little to encourage global corporations to use the UK as a base, with many favouring EU countries with far preferable corporation tax rates such as Ireland, or principalities and dependencies such as Lichtenstein or Jersey.

Moreover the current system is unfair.

Firstly it's unfair to smaller businesses, who don't have the revenues to warrant investing in complex tax reduction practices that larger corporations can afford. Consequently my own small business Dalton Firth Limited paid more corporation tax on 5-figure turnover in 2009 than it was reported that Google UK paid on £1.6bn of advertising revenues.

But I'm not begrudging Google this tax win! Another unfair element to the UK's system of business-related taxes is the large variation in the total tax revenues generated by different business models, irrespective of the pre-[corporation]-tax profits made by these companies.

Despite vast differences in the amount the exchequer gathers from taxes such as employer's national insurance, VAT and the indirect taxes collected in income tax from their employees; each and every business is expected to comply with the same rules regarding corporation tax.

I'm not making a judgement, positive or negative, on how various organisations hitting the headlines recently choose to run their business, so lets take three generic businesses: a mobile phone operator, an investment bank and a large high street retailer.

Both the mobile phone operator and high street retailer will be generating positive VAT returns on goods and services sold, yet the investment bank is unlikely to generate much if any VAT.

Running a national network of stores requires a large workforce. For example Tesco currently employs more than a quarter of a million people in the UK alone. Furthermore the bulk of these employees are UK-based through necessity, so it's pretty safe to assume a retailer will provide a large amount to HMRC by way of national insurance contributions as well as - indirectly - income tax via its staff.

But for other corporations, staff costs as a percentage of turnover can be far less. If our generic investment bank made use of overseas staff, e.g. to run call centres and internet services, they could further-reduce the amount to the UK exchequer by way of their employees.

On paper it's probably fair to tax profits with corporation tax, in addition to all other taxes. But in practice given international competition for global corporate tax revenues it seems only logical that governments should look at the total benefit to the UK economy for each business before deciding the rate at which profits are taxed.

I can stomach paying more in corporation tax than a global megacorp, if that same megacorp is providing jobs and bringing other tangible benefits to the UK economy. But I can't quite face the prospect of some other business with a reasonably high turnover and relatively low employee count finding clever ways to avoid paying taxes.

Only today the Telegraph reports that recently-acquired iconic British name Cadbury is considering a move to Switzerland in order to reduce its annual tax bill. This can't be in the country's best interest.

Perhaps the government has to accept that corporation tax must come down across the board to restore our competitive advantage and level the playing field between businesses who chose to employ expensive tax consultants and those that do not.

Obviously given the current deficit any reduction in corporation tax would have to be offset with an increase in other taxes, but the government must not do what is reported to be occurring: individual settlement deals with some companies, as this somewhat obviously sets a dangerous precedent that could lead to future allegations of favouritism and corruption.

We need a tax system that works fairly for all corporations - one that doesn't rely on intervention on a case-by-case basis to protect the overall interests of the economy, even though such interventions - if they are occurring - are almost certainly in our best interests.

1 comment:

James-VAT is an interesting proposition, since it is a tax that law abiding citizens seem to think is optional when it comes to things like home improvements, as in "No VAT if I pay you cash".The problem with what seems like individuals "harmlessly" avoiding paying a bit of tax actually means that the contractor won't (and indeed can't) declare the income, so there is missing income or corporation tax reveue too. No reason to consider this a legitimate bit of opportunism.My personal remedy would be to do something like take away the Capital Gains Tax exemption on the sale of your main residence if you are caught evading legitimate VAT on building work on that house. If that threat could be made to feel very real, then I would expect much less tax evasion from individuals.